Currency Wars Now Entering Their End Game

Grant Williams, author of the widely read newsletter Things That Make You Go Hmmm, discusses with Financial Sense Newshour the next logical step in the ongoing currency wars, the difficulties facing Japan with import prices, and, lastly, a few thoughts on gold repatriation by central banks. Here, we present a partial transcript of the interview.

The Bank Credit Analyst just reported that the Bank of Japan will expand its balance sheet by 40% to 220 trillion by the end of 2013 and the Fed will also be expanding its balance sheet by 35% this year. What are your thoughts on this?

“Japan has fired the bazooka. They’ve decided to go all in; put all their chips on the table after two decades of very poor economic performance…we’ve entered the realms of complete and utter monetary debauchery in Japan now. They are absolutely desperate to weaken their currency and they figure they can do this, generate inflation, and then unwind it painlessly if they do get there. Kyle Bass has spoken about this phenomenon at lengthover a number of years now and we really do seem to be moving towards this end-game where we’re in a currency war—there’s no two ways about it—and Japan has decided to arbitrarily try and weaken their currency. Now, they’re getting away with it; the Yen’s weakened against the dollar by some 27% in the last few months but, at some point, we’re going to start to see some retaliation. The Koreans particularly need to do that. Japan and Korea compete directly in two very key industries; both of which are automobiles and consumer electronics. If you look at the divergence of the Nikkei and the Kospi in Korea you’ll see that as Japan has weakened its currency and [the Nikkei] strengthened, Korea has gone exactly the other way and it’s too big a deal for this to happen in a vacuum. So, right now, Japan is getting away with this but I suspect in fairly short order once the initial impetus of this trade runs out we’re going to see some salvos fired back by the Koreans and the Chinese—things could get ugly quite quickly I think.”

Japan imports a lot of things—everything from energy to raw materials to food—so how can you continue to import all these items when your currency is being rapidly depreciated?

“Well, you can’t. That’s the problem. And, also, don’t forget that this is a country that got the bulk of its power from nuclear energy and they shut down their reactors after Fukushima. So, the oil import bill last year was $100 billion/day and obviously that’s gone up 30% in Yen terms. But, again, we had one of the cabinet members come out yesterday and say that the government was going to mitigate the effects of inflation for small to medium sized businesses—well, they can’t do it. I’m pretty sure we’re going to see these nuclear reactors turned on as fast as they possibly can because they need to bring some of these costs down for a country that has no energy apart from nuclear.”

Recently, you gave a presentation in Hong Kong where you discuss the process of central banks leasing out their gold while other countries demand theirs back. What do you see taking place?

“Chavez demanding his gold back was the beginning of the end of this little scheme. I don’t know how long it takes to play out but if we assume they [central banks] all lease their gold out to some extent, they all know that the gold is not necessarily all there so it really becomes a game of chicken and with Chavez kind of blinking first...we see a few fringe countries like Azerbaijan, Ecuador, and some of these really small gold holders that started quietly repatriating their own gold. But, as you say, when the Bundesbank announced that they were going to do it, that’s 300 odd tons that they want to bring back from the U.S. That’s a meaningful amount of gold. And once you start getting those big holders pulling their gold back, it really does become, in the case of central bankers, why on earth would you take the risk that you’re the guy who asks for his gold back and it’s not there? And it becomes a huge huge problem..."

"On the face of it, the status quo looks okay and in an environment where there are so many reasons for the gold price to go higher—you know, with this infinite QE on the part of Japan and further QE on the part of the UK and the US, and we’ve got currency camps in Switzerland, we’ve seen the events in Cyprus with deposits actually confiscated—every single one of these is unequivocally positive for the gold price and yet the gold price is kind of stagnating and languishing, but at some point reality is going to assert itself. I don’t know what the event is going to be. We’ve seen plenty of potential catalysts kind of come and go, but at some point that is going to change. As long as this continues, and when it does or if we get a real rush to perfect assets and repatriating gold, the gold price is going to go through the roof.”

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